Japanese refiner Idemitsu wins family backing for Showa Shell merger

By Osamu Tsukimori and Chris Gallagher

TOKYO (Reuters) - Japanese oil refiners Idemitsu Kosan and Showa Shell Sekiyu said on Tuesday they had agreed to merge on April 1 next year, after Idemitsu's founding family dropped its long-standing opposition to the plan.

The refiners will merge via a share swap, and Showa Shell will be delisted on March 29, they said in a statement, pushing the shares of the two companies up sharply in afternoon trade.

The combined firm would account for about 30 percent of Japan's domestic gasoline sales, second only to JXTG Holdings, which controls about half the market.

Idemitsu, Japan's No.2 oil refiner by sales, has long been keen to merge its operations with fourth-ranked Showa Shell in response to shrinking gasoline demand in the country.

But it was locked in a battle for about two years with the Idemitsu founding family, which argued the two firms were too different for any merger to work.

As part of the deal announced on Tuesday, the founding family will be able to nominate two of the eight initial directors of the merged entity.

The share swap ratio will be set in October, followed by extraordinary shareholders' meetings in December to seek approval.

The swap will be conducted for the 68.75 percent of Showa Shell shares that Idemitsu does not own. As of Monday's close, Idemitsu had a market capitalisation of 792.5 billion yen ($7.1 billion) and Showa a market capitalisation of 578 billion yen.

Investors welcomed the deal, pushing up shares in Idemitsu by as much as 17.8 percent on the Tokyo Stock Exchange, while Showa Shell jumped as much as 13.7 percent.

Idemitsu's Chairman Takashi Tsukioka said well known activist investor, Yoshiaki Murakami, had helped persuade a majority of the founding family, which owns just over 28 percent of the company, to back the deal.

Along with the merger, Idemitsu said it would buy back up to 55 billion yen of its own shares through December to return profits to current shareholders before the merger.

Showa Shell Chief Executive Tsuyoshi Kameoka said 15 percent shareholder Saudi Aramco was "very supportive" of the merger.

Kameoka ruled out any closures of the combined company's seven refineries in Japan, although a sector analyst said he hoped one refinery would close within five years given declining domestic demand. He declined to be identified as he was not authorised to speak with media.

The two firms will target net profit of at least 500 billion yen for the total of three business years from 2019, and plan a payout ratio of 50 percent.

The merged firm will use Idemitsu Kosan Co as a company name but will conduct business under the trade name, Idemitsu Showa Shell.

($1 = 111.1500 yen)

(Reporting by Osamu Tsukimori, Taiga Uranaka and Chris Gallagher; Writing by Chris Gallagher; editing by Richard Pullin)